Daily Archives: December 20, 2006

06MOSCOW13006, DENGI FEVER”: RUSSIA’S IPO AND CAPITAL MARKET BOOM

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Reference ID Created Released Classification Origin
06MOSCOW13006 2006-12-20 16:13 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO0207
RR RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #3006/01 3541613
ZNY CCCCC ZZH
R 201613Z DEC 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 5978
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCNCIS/CIS COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RHEHNSC/NSC WASHDC

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 013006 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS 
TREASURY BAKER/GAERTNER 
NSC FOR GRAHAM AND MCKIBBEN 
 
E.O. 12958: DECL: 12/19/2016 
TAGS: ECON EINV EFIN RS
SUBJECT: "DENGI FEVER": RUSSIA'S IPO AND CAPITAL MARKET BOOM 
 
REF: MOSCOW 1898 
 
Classified By: ECON M/C Quanrud, Reasons 1.4 (b/d). 
 
SUMMARY 
------- 
 
1.  (SBU) Russia's initial public offering (IPO) bonanza 
continued to gain momentum in 2006.  Fifteen Russian 
companies launched IPOs this year, raising over $17.5 
billion.  At the same time, Russia's domestic exchanges have 
enjoyed explosive growth.  Russian companies are increasingly 
able to tap the domestic markets for cash, as relaxed listing 
standards and increased liquidity have made Russian exchanges 
attractive IPO venues.  Though motivations vary, many in the 
evolving IPO arena seem focused simply on raising investment 
capital.  To get to the money, Russian companies have had to 
increase transparency and improve corporate governance to 
meet foreign and domestic listing requirements.  Indeed, 
public offerings appear to be playing a significant role in 
transforming Russian business practices and creating a robust 
domestic equities market. 
 
RUSSIA'S IPO BOOM KEEPS BOOMING 
------------------------------- 
 
2.  (SBU) The Russian IPO market has reached new heights this 
year, easily eclipsing the $5 billion raised in 2005 
(reftel).  By the end of 2006, Russia will have the largest 
single stock in the emerging-market universe (Gazprom), will 
have placed the fifth-largest IPO in history (Rosneft), and 
will have raised through equity issuance more money in 2006 
than every country in the world except the U.S., China, and 
France.  And some predict 30-40 more Russian IPOs in the 
coming year, bringing another $30 billion worth of equity to 
the market. 
 
3.  (SBU) As was the case in 2005, the London Stock Exchange 
(LSE) was the foreign exchange of choice for Russian 
companies looking to list abroad, as most see U.S. standards 
as too high and too costly.  More than half of this year's 
Russian IPO activity included listings on the LSE.  However, 
unlike last year, Russian companies also came to the Moscow 
Interbank Currency Exchange (MICEX) and the Russian Trading 
System (RTS) to raise capital, with six Russian IPOs occurred 
exclusively on the domestic exchanges.  Indeed, one of the 
biggest shifts over the year has been the increase in the 
number of Russian companies looking to raise capital at home. 
 
 
4.  (C) The head of Russia's Federal Service for Financial 
Markets (FFMS), Oleg Vyugin, can take much of the credit for 
encouraging growth in the domestic exchanges.  Vyugin has 
simplified the procedure by which companies launch IPOs on 
the Russian markets.  In fact, he claimed recently to us that 
it is now easier to launch an IPO in Russia than it is to do 
so in London.  Vyugin also spearheaded a 30% domestic-listing 
requirement earlier this year, but he is slow to celebrate 
the success of this initiative.  He suspects that brokerages 
operating in Russia have been taking ordinary shares on their 
books, and then sending these same shares abroad.  A deeper 
analysis, which is currently underway, should reveal whether 
Russian capital is staying close to home.  Whatever the 
result, the impressive growth of Russia's domestic exchanges 
is hard to ignore.  The MICEX and the RTS now have a combined 
market capitalization of almost $800 billion, or 80% of GDP. 
Trading on the MICEX grew by 191% over 2005, while the RTS 
grew by 122%.  Around 70% of Russian stock trading now occurs 
on the domestic exchanges, up from 55% one year ago.  Without 
a doubt, the stereotype of a cash-poor Russian equity market 
is crumbling. 
 
NEED FOR CAPITAL IS THE MAIN, 
BUT NOT SOLE, DRIVER 
----------------------------- 
 
5.  (SBU) Russia's economy continues to chug along.  Real GDP 
looks to be coming in just below 7% in 2006.  Russia's money 
supply has increased by 40% this year, yet its inflation rate 
(though still high) will be below 10%.  Both public and 
private consumption have grown over the year, as Russians 
continue to make more money and take out more consumer loans. 
 Capitalizing on new market opportunities has been a 
challenge for Russian firms, as many still suffer from 
underinvestment.  It comes as no surprise that demand for 
investment capital is high.  Russian companies have turned to 
 
MOSCOW 00013006  002 OF 003 
 
 
IPOs to raise the money they need for growth in an 
increasingly competitive market. 
 
6.  (C) Of course, the need for investment capital is not the 
only force driving IPOs.  As in 2005, some strategic 
shareholders have looked to IPOs as a way of "cashing out" of 
their holdings.  Doing so has helped them capture immediate, 
and often tremendous, wealth.  However, our contacts have 
been quick to downplay the significance of the "cash-out" 
incentive in 2006.  They argue that strategic shareholders 
stand to gain much more from staying with their lucrative 
businesses than they do from cashing out of them. 
 
7. (C) Oleg Vyugin echoed this sentiment in our recent 
conversations with him.  He believes raising capital for 
company growth is the main target of recent IPOs.  Vyugin 
also described an additional role IPOs have assumed in 
corporate strategy: enhancing management capacity.  "As a 
company grows, it becomes more difficult for management to 
handle the size of the company."  By increasing the 
shareholder base, new people are attracted to help manage the 
firm.  In some cases, these people are industry elites with 
superlative reputations.  Company boards have been increased 
to include managers championing Western-style business 
practices.  With new management, Russian companies are coming 
to realize that efficiency, increased accountability, and 
improved corporate governance are essential to success in 
today's global market.  And, he adds, strategic investors 
(many of whom are founding oligarchs) have their hands freed 
to pursue other interests. 
 
8.  (SBU) Naturally, companies have been improving business 
practices to the extent there is incentive to do so. 
Standard & Poor's Julia Kochetygova told us that she thought 
listing requirements are shaping changes in transparency and 
corporate governance -- for the better.  For Russian 
companies looking to list abroad, this normally means 
adopting standards sufficient for listing with the LSE. 
Similarly, in an effort to attract investors, Russia's 
domestic exchanges have increased accountability standards 
for companies looking to list in Russia.  Firms trading on 
the MICEX and the RTS now boast transparency and corporate 
governance levels that meet international standards. 
Kochetygova's work shows that most publicly-traded Russian 
firms exceed the listing requirements of LSE's AIM market. 
 
WHO'S BUYING? 
------------- 
 
9.  (SBU) Improvements in macroeconomic conditions and 
increased accountability have encouraged global investors to 
boost exposure to the Russian markets.  In the wake of the 
elimination of the so-called "Gazprom ringfence," emerging 
market indexes have been substantially rebalanced this year. 
The Morgan Stanley Capital International (MSCI) emerging 
markets index, widely considered the industry benchmark, has 
been reconstituted in 2006 to increase its Russia composition 
from 6% in 2005 to 11%.  The upshot of this is that foreign 
investment in Russian equities, once dominated by short-term 
speculators, now comprises more long-term investors.  Large 
international investment houses, such as Morgan Stanley, 
Merrill Lynch, and Citigroup, have come to Russia. 
 
10.  (SBU) Russia's domestic exchanges have also enjoyed 
investment from local institutions.  Mutual funds, pension 
funds, and insurance companies constitute the bulk of 
home-grown interest.  In fact, Russia's mutual fund industry 
has grown from virtually non-existent just a few years ago to 
a $15 billion industry today.  Even so, the domestic markets 
have been slow to attract individual investors.  Less than 3% 
of the Russian population own stock or other investment 
instruments.  Nevertheless, there are signs that a domestic 
investor base is forming.  Our MICEX contacts are confident 
that middle-class Russians will come to the markets as they 
become better informed and more investment savvy. 
 
MUSINGS OF A MARKET REGULATOR 
----------------------------- 
 
11.  (C) In an early December meeting with us, Vyugin said he 
is considering abandoning the 30% domestic-listing 
requirement.  In its place, he would oblige Russian companies 
to launch IPOs on a domestic exchange -- with at least 10% of 
the capital of ordinary shares in Russia -- before listing 
abroad.  This policy change could gain momentum in the coming 
year.  Vyugin has also made some progress on a few of his 
 
MOSCOW 00013006  003 OF 003 
 
 
long-term do-list items.  A draft law addressing price 
manipulation and insider trading (first proposed two years 
ago) is now with the Central Bank, the Ministry of Finance, 
and the Ministry of Economic Development and Trade for final 
comment, although Vyugin believes he has already secured 
their basic agreement.  The draft needs to go through a 
formal signature process, after which it will go to the 
Ministry of Justice for a final check before submission to 
the Government, which he hoped would result in approval by 
the end of this year.  In addition, a draft law creating a 
Central Depository was finalized in August.  The Central 
Depository would absorb the existing depository firms -- a 
move which could receive resistance from those with an 
economic interest in the status quo.  A hardy perennial for 
ten years, Vyugin hopes remaining disagreements over the 
draft law will be resolved by the end of the year. 
 
COMMANDING HEIGHTS STILL 
COMMAND THE MOST MONEY 
------------------------ 
 
12.  (SBU) As prices for oil, nickel, aluminum, platinum, and 
copper reached new highs this year, Russia's state-controlled 
companies benefited most on the bourses.  Russia's energy and 
steel sectors still constitute the largest portion of the 
shares traded on the domestic exchanges, and foreigners 
continue to invest mostly in these sectors.  However, 
Russia's diversifying economy is also producing attractive 
investments in other sectors, particularly in banking, 
communications, and retail, where sectors which were 
well-represented in this year's IPOs.  Russia's largest 
domestic-only listing was retail giant Magnit, whose revenues 
exceeded $1 billion in the first six months of 2006.  Next 
year looks equally promising, as some predict as many as 15 
retail-related companies will launch IPOs. 
 
COMMENT 
------- 
 
13. (C) As Russian companies look to raise capital and gain 
prestige, the requirements for them to do so are slowly 
transforming Russian business practices.  And there's a sense 
that the new wave of business executives coming to Russian 
industry will serve as iconoclasts to the current paradigm of 
opacity and inefficiency.  More and more, Russian companies 
are recognizing that entry into the global business world 
cannot happen without transparency.  Even Russia's 
state-controlled companies have taken notice.  This is not to 
say that companies under state control don't still have a lot 
to learn.  As Oleg Vyugin put it, "an imitation of good 
corporate governance" won't make a company competitive. 
Recent troubles at Gazprom illustrate this fact: either you 
become efficient, or your stock price will freeze. 
 
14.  (C) Russia's domestic exchanges will continue to grow in 
2007.  Thus far, they have been able to produce surprisingly 
impressive trading numbers with relatively few issuers.  This 
year we saw signs of a virtuous circle that we believe has 
not quite run its course: with new listings come new 
investors and added liquidity, which will likely lure yet 
more to the IPO tab
le.  To the extent this also forces 
transparency and compliance with international norms and 
market expectations, it is one of the most visible signs of 
grass-roots economic reform in Russia.  The real test will 
come when global and domestic liquidity tightens, and the 
fight to keep shareholders happy sharpens. 
RUSSELL

Wikileaks

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06MOSCOW13005, RUSSIA’S 2007 BUDGET: A QUICK OVERVIEW

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Discussing cables
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Reference ID Created Released Classification Origin
06MOSCOW13005 2006-12-20 15:59 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXYZ0002
RR RUEHWEB

DE RUEHMO #3005/01 3541559
ZNY CCCCC ZZH
R 201559Z DEC 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 5976
RUEATRS/DEPT OF TREASURY WASHDC
INFO RHEHNSC/NSC WASHDC

C O N F I D E N T I A L MOSCOW 013005 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS 
TREASURY BAKER/GAERTNER 
NSC FOR MCKIBBEN AND GRAHAM 
 
E.O. 12958: DECL: 12/19/2015 
TAGS: ECON EFIN PGOV RS
SUBJECT: RUSSIA'S 2007 BUDGET: A QUICK OVERVIEW 
 
REF: SEPARATE UNCLASS EMAIL ATTACHMENT 
 
Classified By: ECON M/C Pam Quanrud, Reasons 1.4 (b/d). 
 
Summary 
------- 
 
1.  (SBU) Despite considerable chatter to the contrary, 
Russia's 2007 Federal Budget (signed into law December 20 by 
President Putin) continues to reflect substantial fiscal 
restraint, with expenditures set to rise by just 1.5 percent 
of GDP and the primary surplus targeted at 5.3 percent of 
GDP.  The restraint is all the more noteworthy in light of 
the 2007-08 election cycle here and the pressing need to 
improve Russia's collapsing physical and social 
infrastructure.  Of note, and the source of some debate, has 
been the relatively high budget assumption for Urals crude -- 
at USD 61 a barrel, the Russian Government is at the top end 
of consensus forecasts (USD 55-61).  With this initial foray, 
Finance Minister Kudrin appears to be trying to soften the 
ground for the next budget, which he hopes to make "oil 
free," or independent of oil export revenue.  This year's 
budget balances at a per-barrel price of Urals of USD 37 -- 
making it fairly bullet-proof from a fiscal perspective. 
Further details and charts are being sent via separate 
unclass email attachment.  End Summary. 
 
SIPDIS 
 
Salient Macro Features 
---------------------- 
 
2.  (SBU) The budget for 2007 marks a departure from recent 
budgets in being relatively optimistic in many, but not all, 
its assumptions, with the per-barrel price of Urals crude oil 
set at USD 61, at the top of the consensus forecast range, 
and natural gas pegged at USD 294, up 60 percent on 2006. 
Both the CPI assumptions (from 6.5 to 8 percent) and the 
ruble-dollar exchange rate (at RUB 26.5 per dollar) reflect 
an anticipated easing of so-called "Dutch disease" pressures 
in 2007, based on relatively good performance on both 
indicators in H2 2006.  That said, most experts believe that 
current account surpluses, combined with increased government 
expenditures, will continue to exert inflationary pressure in 
2007, and that to contain the upward pressure, monetary 
authorities are likely to allow the ruble to appreciate.  At 
the G-20 meeting in Melbourne, Kudrin said that real 
effective ruble appreciation would not exceed 5 percent in 
2007 provided that the Urals price does not exceed USD 61 per 
barrel. To really keep inflation in check, prices in the 
mid-50's would be welcome.  Interestingly, the GDP forecast 
for 2007 contained in the budget calls for only a 6 percent 
increase, which is lower than consensus forecasts, but may 
only reflect the fact that the budget process began in July 
-- long before the H2 2006 pick-up in the economy. 
 
3.  (C) There has been widespread speculation regarding 
Finance Minister Aleksey Kudrin's acceptance of the 
relatively high USD 61 per-barrel assumption put forward by 
the Ministry of Economic Development and Trade.   Some 
commentators, including Renaissance Capital Chief Economist 
Vladimir Pantyushin, suggest that Kudrin has his sights set 
on a non-oil budget for 2008 (Kudrin has warned against undue 
reliance on oil revenues to finance budget programs) and this 
year's overshoot assumption will help set the stage. 
Pantyushin notes that if actual revenues were to fall below 
budgeted revenues because of a lower than expected price for 
Urals, Kudrin would be able to argue the dangers in a budget 
dependent on oil export revenues.  Kudrin's chief of staff, 
Vadim Grishin, has confirmed this analysis with us in private. 
 
Revenue 
------- 
 
4.  (SBU) The 2007 budget provides for revenue of RUB 6.97 
trillion (USD 265 billion, or 22.3 percent of GDP), largely 
in line with 2006 actual revenue flows (in percent of GDP 
terms). The Ministry of Finance believes that "non-oil 
revenue" will grow by 1.2 percent of GDP in 2007 -- a 
positive trend, since in recent years this figure has been in 
decline.  To achieve growth in "non-oil" revenue, the GOR 
will need to enhance its collection and administration of 
taxes, which is clearly a double edged proposition in Russia. 
 
Expenditure 
----------- 
 
5.  (C) President Putin has called for higher spending in 
2007, and in the medium-term "at a pace adequate to the pace 
of economic growth."  Expenditures in 2007 are slated to 
remain constant in percent of GDP terms, with the 1.5 percent 
of GDP in spending falling solely on the non-interest 
expenditure side of the budget.  Transfers to regional and 
local governments still dominate the budget.  Cynics will say 
that this represents a serious slackening of fiscal 
federalism discipline, but economic reformers says they need 
this ability to reward and punish as part of the process of 
enforcing both budget discipline and new mandates on 
sub-federal actors -- a kind of necessary evil on the way to 
a more stable fiscal federal system in the long term. 
Defense, national security and law enforcement will see 
slight increases in percent of GDP terms compared with 2006, 
but while higher spending is on tap for healthcare and &#x
000A;education -- two of the four National Priority Projects -- no 
one walked away with any serious spending boost for 2007. 
Grishin says that the pressure to spend is greater than ever, 
but Kudrin managed to keep Economic Minister Gref's 
Investment Fund, which finances infrastructure and industry 
development projects on the basis of public-private 
partnerships (PPP), to a modest RUB 110 billion (USD 4.2 
billion) in 2007, and the new Venture Fund, aimed at spurring 
PPP investments in IT and the high-tech sector, to RUB 15 
billion (USD 570 million). 
 
Stabilization Fund 
------------------ 
 
6.  (SBU) The Stabilization Fund will continue to see 
contributions from the mineral extraction tax and export 
duties generated by the price of Urals crude over USD 27 per 
barrel as well as the overall budget's surplus.  By the end 
of 2007, it is expected to almost double to USD 165 billion. 
As if to vindicate Pantyushin's argument about the Finance 
Ministry's interest in the non-oil budget concept, Kudrin 
submitted a proposal to Prime Minister Fradkov on December 5 
that calls for all oil and gas revenues be collected into a 
new Oil and Gas Fund.  According to Kudrin's plan, the Oil 
and Gas Fund would consist of a "reserve" component and a 
"savings account."  It would also replace the Stabilization 
Fund.  The Oil and Gas Fund's reserve component would be used 
to finance budget deficits and, once it reaches 7-10 percent 
of GDP, would finance the savings account, which would pay 
for pensions and other social programs.  Kudrin's proposal 
specifies no timeline, and would need GOR approval before 
going into effect. 
 
Comment 
------- 
 
7.  (SBU) The 2007 budget is not exactly internally 
consistent in its assumptions, but perhaps we can understand 
why.   (Most obviously, a high Urals price implies demand for 
rubles will be equally high, which would put pressure on the 
ruble-dollar exchange rate and inflation.)  If Kudrin's 
volley works, next year will not witness the revenue 
overshoots we are seeing this year, and at least the 
"perceived" shortfall in the budget may prove useful in 
making his bold argument for a future budgeting process 
independent of oil revenue. In the meantime, at a minimum, it 
may prove a useful brake on election-year spending 
temptations. 
RUSSELL

Wikileaks

06MOSCOW13003, BOEING RUSSIA: AEROFLOT 787 DEAL DEPENDS ON

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If you find meaningful or important information in a cable, please link directly to its unique reference number. Linking to a specific paragraph in the body of a cable is also possible by copying the appropriate link (to be found at theparagraph symbol).Please mark messages for social networking services like Twitter with the hash tags #cablegate and a hash containing the reference ID e.g. #06MOSCOW13003.
Reference ID Created Released Classification Origin
06MOSCOW13003 2006-12-20 15:56 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO0168
PP RUEHAG RUEHROV
DE RUEHMO #3003 3541556
ZNY CCCCC ZZH
P 201556Z DEC 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 5974
RHEHNSC/NSC WASHDC PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE

C O N F I D E N T I A L MOSCOW 013003 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB AND EUR/RUS 
STATE PLEASE PASS USTR FOR AMB DONNELLY, DWOSKIN 
USDOC FOR 4321/ITA/MAC/EUR/RISA BROUGHER AND BEADLE 
USDOC FOR 3004/CS/ADVOCACY/BLOOM 
NSC FOR GRAHAM AND MCKIBBEN 
 
E.O. 12958: DECL: 12/20/2016 
TAGS: ECON PREL EAIR USTR RS
SUBJECT: BOEING RUSSIA: AEROFLOT 787 DEAL DEPENDS ON 
COOPERATION WITH UAC 
 
Classified By: ECON M/C Quanrud by reason 1.4(b/d). 
 
1. (SBU) According to Boeing sources, Minister of Finance 
Kudrin, Minister of Economic Development and Trade Gref, and 
Minister of Industry and Energy Khristenko agreed on December 
19 to delay the GOR's decision on Aeroflot's acquisition of 
22 wide-bodied jets until the GOR receives written proposals 
from Airbus and Boeing on potential cooperation with the 
United Aircraft Corporation (UAC).  Due to the absence of a 
GOR decision on aircraft purchase, the Dreamliner vote never 
made the Aeroflot Board's December 19 agenda. 
 
2. (SBU) Boeing plans to caucus in Seattle January 9-13 to 
decide what proposal, if any, to submit in response to the 
GOR request. Over the past three weeks, Boeing has amended 
its thinking on the 787 sale, and while Aeroflot will loose 
its 2011 delivery slots on January 1, the current contract 
will not be torn up, as was previously contemplated.  All of 
this means that lengthy contract and price renegotiations 
will therefore not be necessary in the new year. 
 
3. (SBU) Both Boeing and EADS are already working actively 
with UAC component companies.  Boeing is Sukhoi's principal 
partner on the SuperJet100, and is considering a joint 
venture on the Sukhoi SuperSonic Business Jet (a corporate 
jet that could break the sound barrier).  Boeing has hosted 
countless design engineers from Sukhoi and other UAC member 
companies as detailees in its Moscow Boeing Design Center, 
conveying significant technical and management expertise. 
 
4. (SBU) EADS owns 10% of Irkut, and is working with the 
company on A330 cargo conversions.  In its rush to bring the 
A359XWB to market without further delays, EADS is rumored to 
be ready to subcontract out up to 45% worldwide. UAC is 
looking at some of the design and manufacturing work, as EADS 
tries to control labor costs and avoid additional delays. 
Russia's state-owned Vneshtorgbank owns approximately 6% of 
EADS and sits on the UAC Board.  The press is circulating 
rumors that the GOR wants to transfer the EADS stock to UAC 
as an "insurance policy" that cooperation between the two 
companies will go well. 
 
COMMENT 
------- 
 
5. (C) Aircraft-manufacturing has become informally known as 
the "fifth national priority project" and the success of the 
United Aircraft Corporation is being increasingly cast as 
vital to Russia's national security.  The GOR is actively 
seeking foreign partners for UAC, and is apparently prepared 
to leverage Aeroflot's pending purchase of 22 wide-bodied 
jets in the effort.  With this new twist, the clear 
commercial merits of the 787 over the yet-to-be-designed 
A350XWB are losing further ground.  Independent of the firm's 
reply to the latest GOR call for cooperation, Boeing 
management has said that it will continue to grow its Moscow 
Design Center and titanium joint-venture because of their 
inherent value to the company.  As this battle ripens, EADS 
will have to decide how far it is willing to go in what looks 
to be a parasitic relationship with the emerging UAC, but, 
for UAC's part, the state controlled EADS may be a more 
attractive mate. 
RUSSELL

Wikileaks

06MOSCOW13002, RUSSIAN DEVELOPMENT “BANK” TAKES SHAPE

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Reference ID Created Released Classification Origin
06MOSCOW13002 2006-12-20 15:01 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Moscow

VZCZCXYZ0031
RR RUEHWEB

DE RUEHMO #3002/01 3541501
ZNR UUUUU ZZH
R 201501Z DEC 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 5972
INFO RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC

UNCLAS MOSCOW 013002 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/RUS 
TREASURY FOR BAKER/GAERTNER 
NSC FOR MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV RS
SUBJECT: RUSSIAN DEVELOPMENT "BANK" TAKES SHAPE 
 
 
Summary 
------- 
 
1.  (SBU) At a meeting of cabinet ministers on December 14, 
Economic Development and Trade Minister German Gref delivered 
a presentation on the prospective scope and functions of a 
new Russian Development Bank (RDB).  Gref's proposal would 
consolidate the Foreign Economic Activity Bank of the USSR 
(Vneshekonombank, VEB), the existing Russian Development 
Bank, and the Russian Export-Import Bank into a unified 
government development-financing structure.  The new 
institution would have charter capital totaling USD 70 
billion and would provide long-term financing for 
infrastructure projects and high-tech, export-oriented 
industries.  The ministers approved Gref's concept and 
Finance Minister Aleksey Kudrin's suggestion that the Prime 
Minister serve as the head of the RDB's Oversight Council. 
Prime Minister Mikhail Fradkov directed the ministers to 
develop a draft bill on the bank before the end of the year. 
End Summary. 
 
Russian Development Bank: Long-Term Focus 
----------------------------------------- 
 
2.  (SBU) Addressing a cabinet ministers' meeting on December 
14, Economic Development and Trade Minister German Gref 
outlined the prospective objectives and functions of the 
proposed Russian Development Bank (RDB).  He explained that 
the RDB would emerge from the consolidation of the Foreign 
Economic Activity Bank of the USSR (Vneshekonombank, VEB), 
the existing Russian Development Bank, and the Russian 
Export-Import Bank.  Gref emphasized that the government 
should foster transparency and self-sufficiency in RDB 
operations.  The consolidated structure would start 
operations from a capital base of USD 70 billion with the 
goals of supporting economic development, establishing new 
market sectors, and eliminating infrastructure imbalances 
among Russia's regions.  The RDB's main lines of business 
would be infrastructure and social projects, development and 
export of high-tech products, advanced technology imports, 
research and development support, and small business 
financing. 
 
3.  (SBU) Gref observed that the RBD, which President Putin 
first advocated in January, would complement existing 
government-supported institutions such as the Agency for Home 
Mortgage Lending, the Federal Agency for Management of 
Special Economic Zones, and the Investment Fund.  He also 
told cabinet members that the proposed move was in keeping 
with other countries' experience in establishing government 
finance institutions.  He expressed hope that the RDB would 
reproduce the successes of Ex-Im Bank in the U.S., the 
Japanese Development Bank, and Brazil's Socio-Economic 
Development Bank.  Gref argued that the RDB, as a government 
development institution, should focus on long-term project 
finance.  He suggested that partnership with the private 
sector would not only reduce some of the government's burden 
in supporting priority sectors, but also raise the 
profitability of longer-term endeavors. 
 
Not a Traditional Bank 
---------------------- 
 
4.  (SBU) Under Gref's plan, the RDB would not serve as a 
bank in the traditional sense of the word since it would not 
operate under a license from the Central Bank.  The RDB would 
neither make loans to individuals nor trade in securities, 
and would require special legislation to be organized as a 
government corporation.  Gref suggested that the 
legislation's general guidelines for the RDB should be to 
diversify the economy, improve infrastructure, and create 
conditions for long-term economic development.  The 
government would review the RDB's performance annually and 
adjust priority areas as necessary.  The government would 
provide general oversight, and the RDB would be subject to 
independent audits. 
 
RDB Concept Ultimately Approved 
------------------------------- 
 
5.  (SBU) There was apparently some debate.  Deputy Prime 
Minister Medvedev recommended calling the institution the 
"Russian Development Fund" or "Russian Development 
Corporation" since it would not technically operate as a 
bank.  Justice Minister Ustinov offered general objections to 
Gref's plan, noting that many laws would need to be passed 
for the RDB to function as outlined.  In an apparent effort 
to forge consensus among the ministers, Finance Minister 
Kudrin urged that the government appoint the RDB's leadership 
and suggested the Prime Minister serve as the head of the 
Oversight Council.  The ministers unanimously approved the 
RDB concept, and Prime Minister Fradkov directed the 
ministers to develop draft legislation that could be 
submitted to the Duma before the end of the year. 
 
Comment 
------- 
 
6.  (SBU) The idea of a Russian Development Bank had been 
kicking around for years prior to Putin's January nudge. 
Gref's presentation fell short of the mark that Putin had set 
earlier this year, namely that the government's draft bill on 
the Russian Development Bank be presented to the Duma by 
Decemb
er 15, but it advanced the issue nevertheless. 
Disagreements between Gref and Kudrin on the prospective 
bank's functions slowed the process this year, but now these 
appear to be behind them.  The establishment of this bank 
would be a concrete measure in the emerging unified policy 
that Gref has often articulated to promote genuine 
diversification of the Russian economy, including through 
exports.  The proposed legislation creating the RDB, however, 
is likely to be very general in nature, given the two-week 
deadline and Prime Minister's reported frustration at 
"waiting months for us to give birth to this bank."  End 
Comment. 
RUSSELL

Wikileaks

06MOSCOW13001, PATRUSHEV’S NEST OF DANISH SPIES

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Reference ID Created Released Classification Origin
06MOSCOW13001 2006-12-20 14:46 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO0069
RR RUEHDBU
DE RUEHMO #3001 3541446
ZNY CCCCC ZZH
R 201446Z DEC 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 5971
INFO RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUCNCIS/CIS COLLECTIVE
RUEHGV/USMISSION GENEVA 4965

C O N F I D E N T I A L MOSCOW 013001 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 12/20/2016 
TAGS: PGOV PHUM PREL PREF RS
SUBJECT: PATRUSHEV'S NEST OF DANISH SPIES 
 
Classified By: Political Minister-Counselor Alice Wells. 
Reasons 1.4 (b and d). 
 
 1.  (SBU) FSB Director Nikolai Patrushev alleged that 
foreign intelligence services were increasingly using NGOs 
and press bureaus as cover in his annual year-end review 
December 19.  Speaking on the eve of the day in honor of the 
security services, Patrushev singled out the Danish Refugee 
Council (DRC) and accused it of employing terrorists, 
diverting aid, and collecting "biased information." 
Patrushev said that a DRC employee had been arrested for 
terrorism in July when a homemade bomb was found in his car 
during a traffic stop.  He also alleged that DRC had sent 
Danish employees with experience in intelligence gathering to 
work in Russia.  DRC had collected information on social, 
political, and economic conditions in the North Caucasus, as 
well as information on military matters and the potential for 
new outbreaks of violence, he said. 
 
2.  (C) Patrushev, other Russian officials, and Russian media 
have made similar allegations that NGOs, including in those 
in the North Caucasus, have links to foreign intelligence. 
Expatriates working for NGOs in the North Caucasus have told 
us repeatedly that they are assumed to be spies.  They are 
watched closely by English-speaking FSB agents in the region 
and are occasionally asked to come in for interviews with 
them.  In October, NTV aired a highly critical documentary 
about foreign aid groups in the North Caucasus, including an 
interview with a DRC official, repeating what have become 
familiar charges of aid diverted to rebels, terrorist 
employees, and corruption.  Earlier this year, the FSB 
claimed that it had uncovered a British spy network linked to 
Russian NGOs.  In May 2005, Patrushev  said that U.S., 
British and other foreign NGOs provided cover for foreign 
intelligence agents.  Included in Patrushev's charges were 
the Peace Corps, the British NGO Merlin, the Saudi Red 
Crescent Society, and the Society of Social Reforms and 
Society for Islamic Revival, both based in Kuwait. 
 
3.  (C) A DRC staff member in the North Caucasus said 
December 20 that the NGO had been surprised by Patrushev's 
remarks.  There had been no unusual FSB interest in its 
activities, and it was operating normally.  She noted that 
DRC had quickly been re-registered by the Federal 
Registration Service.  She confirmed that a DRC employee had 
been arrested and convicted on charges of terrorism earlier 
this year, but his confession appeared to have been coerced. 
DRC continued to submit all local staff for background checks 
by the authorities, including the FSB and the Russian 
military.  And it continued to be praised for its work by 
federal and local authorities, including the MFA, PolPred 
Kozak, and the Chechen Government.  (NOTE:  DRC has also 
tried to develop a good working relationship with the FSB and 
has regular contacts with them in the North Caucasus and 
Moscow.  END NOTE).  A contact at the Danish Embassy said 
they considered the allegations as part of Patrushev's annual 
report on the FSB's achievements and stressed that the 
allegations are unfounded.  The Danish Government had no 
plans to issue a statement, he said. 
 
4.  (C) COMMENT:  GOR harassment of and allegations of 
espionage against foreign NGOS in the North Caucasus are 
cyclical, and usually pass without any long-term effect on 
their operations.  As the largest NGO in the region, DRC is 
an easy target for Patrushev in a year that has largely 
focused on GOR suspicions of NGOs and the need to regulate 
them.  We know of nothing that would substantiate the 
allegations against DRC.  END COMMENT. 
RUSSELL

Wikileaks

06MOSCOW12999, SOUTH OSSETIA: TALKS AND OBSERVERS

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Reference ID Created Released Classification Origin
06MOSCOW12999 2006-12-20 14:22 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO0050
PP RUEHDBU
DE RUEHMO #2999 3541422
ZNY CCCCC ZZH
P 201422Z DEC 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 5969
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY

C O N F I D E N T I A L MOSCOW 012999 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 12/20/2017 
TAGS: PREL MARR OSCE GG RS
SUBJECT: SOUTH OSSETIA:  TALKS AND OBSERVERS 
 
REF: STATE 200939 
 
Classified By: PolMilCouns Alice G. Wells.  Reason:  1.4 (b, d) 
 
1. (C) We met with Russian MFA Ambassador-at-Large for South 
Ossetia Yuri Popov on December 19 and 20, delivering reftel 
demarche on the latter date.  Popov said he had not been 
following the budget issue -- he has just returned from leave 
-- and said he was unwilling to repeat previous Russian 
statements on the question of expanding the number of OSCE 
monitors.  He preferred to make no comment and promised to 
"process" the issue with his superiors and get back to us. 
 
2. (C) Popov was focused on the prospect of two meetings. 
The first, less controversial, was a meeting proposed by OSCE 
HOM Reeve to take place in January in Yerevan.  More 
immediate was a newer proposal by the South Ossetians for an 
informal meeting December 27 in Tskhinvali.  Popov showed us 
a December 12 fax from Kokoity to the JCC chiefs.  It began 
with the ritual cursing of Georgia but went on to invite the 
JCC, EU, OSCE and UNHCR chiefs to meet informally with him in 
Tskhinvali to revitalize both the JCC Working Groups and the 
 
SIPDIS 
Authorized Delegations Experts Groups. 
 
3. (C) Popov then showed us the December 19 reply from 
Georgian State Minister Antadze.  It began with the ritual 
cursing of the Ossetians but went on to accept the invitation 
to meet with the JCC and to request a direct bilateral 
meeting with Kokoity.  Popov said Antadze's reply was 
problematic:  Antadze mentioned only a meeting with the JCC 
Co-Chairs, and Popov feared he would walk out if Kokoity 
tried to join in.  He also noted that Kokoity was unlikely to 
grant Antadze a bilateral meeting, as the South Ossetians 
would consider Antadze's "level" inappropriate. 
 
4. (C) We replied that Antadze had not mentioned the EU, OSCE 
or UNHCR in his acceptance either, but he would clearly be 
willing to include them; nor had he made his acceptance 
conditional on getting a bilateral meeting with Kokoity.  We 
urged Popov to take yes for an answer and contact Antadze 
directly to work out any protocol problems.  Popov said the 
issue was between the South Ossetians and Georgians; he had 
called the South Ossetians and urged them to work out the 
issues directly with Antadze. 
 
5. (C) Popov thought Russian relations with Georgia have 
stabilized at their current low level, neither dropping 
further nor improving.  He said press and politicians' 
fulminations about upcoming Georgian military actions were 
nonsense, and believed the chances of military confrontation 
are now very low.  He assured us that the MFA -- including 
the Minister -- believed that sanctions against Georgia must 
be relaxed.  Russia's Ambassador to Georgia is "desperate" to 
return, and Popov believed he might be sent back to Tbilisi 
early in the new year. 
 
6. (C) Comment:  Diplomatic presence is the only sanction 
against Georgia over which the MFA has jurisdiction or, 
possibly, influence.  Publicly, the GOR line remains as hard 
as ever.  With the press on December 19 and 20, FM Lavrov 
accused Georgia of bad faith, hostile actions, and gearing up 
to use force.  He placed all blame on Georgia for current 
cold relations, and claimed that Georgia had left Russia's 
offered hand of friendship "hanging in the air." 
RUSSELL

Wikileaks

06MOSCOW12993, EXTRANCHECK: POST-SHIPMENT VERIFICATION:

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If you find meaningful or important information in a cable, please link directly to its unique reference number. Linking to a specific paragraph in the body of a cable is also possible by copying the appropriate link (to be found at theparagraph symbol).Please mark messages for social networking services like Twitter with the hash tags #cablegate and a hash containing the reference ID e.g. #06MOSCOW12993.
Reference ID Created Released Classification Origin
06MOSCOW12993 2006-12-20 13:36 2011-08-30 01:44 UNCLASSIFIED Embassy Moscow

VZCZCXYZ0019
PP RUEHWEB

DE RUEHMO #2993 3541336
ZNR UUUUU ZZH
P 201336Z DEC 06
FM AMEMBASSY MOSCOW
TO RUCPDOC/USDOC WASHDC PRIORITY
INFO RUEHC/SECSTATE WASHDC 5958
RUEAORC/USCBP WASHDC

UNCLAS MOSCOW 012993 
 
SIPDIS 
 
USDOC FOR 532/OEA/DMUSLU/MHAMES 
USDOC FOR 3150/USFCS/OIO/CEENIS/MCOSTA 
USDOC FOR 532/OEE/MO'BRIEN 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: BEXP ETRD ETTC RS
SUBJECT: EXTRANCHECK: POST-SHIPMENT VERIFICATION: 
SUPREME COMMERCIAL COURT, MOSCOW, RUSSIA, LICENSE NO: 
D350061 
 
REFTEL: USDOC 06460 
 
1. Unauthorized disclosure of the information provided 
below is prohibited by Section 12C of the Export 
Administration Act. 
 
2. Reftel requested a post-shipment verification to 
determine the legitimacy and reliability of the end- 
user, Supreme Commercial Court, Moscow, Russia. The 
company was listed on BIS license number: D350061 as 
the ultimate consignee of information security 
software (operating system) SM2AIPBK9-12217 (1), flash 
image (read-only memory) SC6K-S323K9-8.4, (1), 
information security software, S222ZK9-12218SX, (1), 
information security software, CD374-AISK9 (1), 
information security software, CD384-ASK9 (1) ECCN: 
5D002. These commodities are controlled for national 
security reasons, and telecommunications equipment 
(Supervisor Engine) WS-SUP32-10GE-3 (2), ECCN: 5A991. 
These commodities are controlled for anti-terrorism 
reasons.  The exporter is Cisco Systems, Inc., 170 
West Tasman Drive, San Jose, CA 95134. 
 
3. On December 19, 2006, Export Control Attache Donald 
Pearce and FSN Natalya Shipitsina conducted the 
requested post-shipment verification with the Supreme 
Commercial Court (SCC), 12, Maly Kharitonievsky per., 
Moscow, Russia. The export control team met with 
Aleksandr Ilyin, Deputy Head of the Information and 
Communications Department and Igor Solovyev, Head of 
the Information and Communications Department. 
 
4. The SCC was founded 15 years ago as part of the 
establishment of the Russian Federation.  The court 
traces its roots back to the Tsarist era, when 
Commercial Courts of the Tsar were established for the 
administration of commercial law and codes.  Currently 
the Commercial Court has a four-tiered system 
consisting of 113 local and regional courts, with the 
SCC as the court of final appeal in the process.  The 
SCC is also the administrative headquarters for the 
system.  The SCC works closely with the U.S. Embassy 
on several programs regarding international commercial 
issues and jurisprudence.  The SCC employs around 500, 
and is located in the city center of Moscow. 
 
5. The SCC received and has loaded on to their system 
the software and equipment noted in reftel to secure 
the Court's computer network.  The network links all 
113 subordinate courts to the SCC.  Ten specialists 
have routine access to the servers, which are located 
on the first, fourth and fifth floors, respectively. 
The optical network and one of the Internet servers 
was funded by a project of the World Bank.  The team 
was shown three server stacks, where the software is 
being utilized.  The two Supervisor Engines as noted 
in reftel were racked in the fourth floor and fifth 
floor server racks. 
 
6. The server rooms are all located in controlled 
access areas, and rooms are locked with both standard 
key locks and a proximity card security system.  The 
building is guarded at all times by an armed security 
police unit, and has an electronic security system. 
The authorized users of the system are all employees 
of the Commercial Court system; there are no users on 
the network who are not affiliated with the court. 
 
7. Recommendations: Post recommends Supreme Commercial 
Court, Moscow, Russia as reliable recipients of 
sensitive U.S. origin commodities. 
(FCS MOSCOW/SBOZEK/DPEARCE) 
BURNS

Wikileaks

06MOSCOW12992, EXTRANCHECK: PRE-LICENSE CHECK: ITRC “MIR”,

WikiLeaks Link

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Discussing cables
If you find meaningful or important information in a cable, please link directly to its unique reference number. Linking to a specific paragraph in the body of a cable is also possible by copying the appropriate link (to be found at theparagraph symbol).Please mark messages for social networking services like Twitter with the hash tags #cablegate and a hash containing the reference ID e.g. #06MOSCOW12992.
Reference ID Created Released Classification Origin
06MOSCOW12992 2006-12-20 13:35 2011-08-30 01:44 UNCLASSIFIED Embassy Moscow

VZCZCXYZ0017
PP RUEHWEB

DE RUEHMO #2992/01 3541335
ZNR UUUUU ZZH
P 201335Z DEC 06
FM AMEMBASSY MOSCOW
TO RUCPDOC/USDOC WASHDC PRIORITY
INFO RUEHC/SECSTATE WASHDC 5956
RUEAORC/USCBP WASHDC

UNCLAS MOSCOW 012992 
 
SIPDIS 
 
USDOC FOR 532/OEA/MHAMES/LRITTA 
USDOC FOR 3150/USFCS/OIO/CEENIS/MCOSTA 
USDOC FOR 532/OEE/MO'BRIEN 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: BEXP ETRD ETTC RS
SUBJECT: EXTRANCHECK: PRE-LICENSE CHECK: ITRC "MIR", 
MOSCOW, RUSSIA, LICENSE NO. D365307 
 
REFTEL: USDOC 02863 
 
1. Unauthorized disclosure of the information provided 
below is prohibited by Section 12C of the Export 
Administration Act. 
 
2. Reftel requested a Pre-license check to determine 
the legitimacy and reliability of the end-user, ITRC 
"MIR", Moscow, Russia. The company is listed on BIS 
license application D365307 as the ultimate consignee 
of a traveling wave tube, model: VTU6125C4. These 
items are controlled for national security, nuclear 
non-proliferation reasons under ECCN 3A001. The 
licensee is Communications and Power Industries, 811 
Hansen Way, Palo Alto, CA 94304. 
 
3. On December 15, 2006, Export Control Attache Donald 
Pearce and FSN Natalya Shipitsina conducted the 
requested pre-license check at the offices of 
Intergovernmental TV and Radio Company "Mir" (ITRC 
Mir), 44, Krasnobogatyrskaya St., Moscow, Russia. The 
export control team met with Aleksey Ikonnikov, Vice 
President. 
 
4. ITRC Mir was founded in 1993 by a multilateral 
decree of the governments of Russia, Tajikistan, 
Belarus, Georgia, Moldova, Armenia, Kazakhstan, 
Kyrgyzstan, and Azerbaijan after the dissolution of 
the Soviet Union.  The company was formed to provide 
satellite uplink/downlink services for media and 
private organizations. The shareholders of the company 
are the heads of government of each member country, 
and the company is 100% owned by these governments. 
The company has an office in each country, and three 
in Russia located in Moscow, St. Petersburg, and 
Vladikhavkaz.  The headquarters of the organization is 
at the Moscow location, which employs 300. 
 
5. The primary use of the satellite network is for 
television program transmission and electronic 
newsgathering.  The satellite network went live in 
1996, and currently broadcasts 18 hours of news and 
public affairs / public interest programming from the 
Moscow office daily.  The equipment utilized in the 
Moscow center is all of U.S. origin, and was installed 
in 1998.  ITRC Mir also leases satellite time to 
private organizations and other government users.  The 
company hopes to expand its Russian operations, and is 
exploring options to obtain more bandwidth to support 
additional programming.  Mr. Ikonnikov believes the 
demilitarization of certain satellite band frequencies 
will allow for additional band segments for ITRC Mir. 
The company is increasing the budget for replacement 
of equipment to 12,000,000 USD, up from 8,000,000 USD 
last year. 
 
6. The Traveling Wave Tube (TWT) in reftel will 
replace a damaged TWT utilized in a mobile satellite 
ground station.  The mobile ground station system, 
known as a "flyaway," allows ITRC Mir to establish 
ground stations in the field for electronic 
newsgathering operations, and for establishing a 
temporary satellite connection at a client facility. 
The TWT, which contains a glass tube, was broken in 
the field. The team was shown a CPI VTU-6395M2 TWT, 
serial number 98D013-accept date 9821.  Digital 
photographs of the TWT were taken and are available 
from post upon request.  ITRC Mir has contracted to 
replace the damaged goods through Communications and 
Power Industries (CPI) regional office in Cham, 
Switzerland.  The Russian distributor, NPO 
Svyazproyekt, is listed as an intermediate consignee, 
and is handling customs formalities. 
 
7. When not in use, the TWT is stored at the ITRC Mir 
office in Moscow.  The office has a 24x7 security 
presence, as satellite centers are officially 
considered to be sensitive sites under Russian law. 
Each flyaway has two engineers and two operators who 
are responsible for use, maintenance and security of 
the unit when in the field.  The storage facility at 
the Moscow office is a locked room with limited 
access. 
 
8. Recommendations: Post recommends ITRC Mir, Moscow, 
Russia, as reliable recipients of sensitive U.S. 
origin commodities. It is requested that post be 
 
notified of final disposition of the application, and 
of any shipments for this organization in order to 
conduct appropriate FCS follow-up and statistical 
reporting. 
(FCS MOSCOW/SBOZEK/DPEARCE) 
BURNS

Wikileaks